Global reinsurers have tightened their terms and conditions to limit their aggregate covers and the lower layers of their natural catastrophe protection, largely in response to increasingly frequent and volatile weather-related losses due to climate change, according to Fitch Ratings.
European insurers have become more exposed to weather-related losses due to reinsurers providing less cover against medium-sized natural catastrophe risks
This leaves insurers much less protected against secondary peril events. In addition, higher reinsurance prices have led some insurers to buy less cover.
Global reinsurers are cutting back on the cover they provide against medium-sized natural catastrophe risks due to investor pressure after several years of large catastrophe losses and improved profitability in other parts of the market, Fitch Ratings says.
Some companies were already retreating from the property-casualty insurance market in 2022 but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection.
This leaves primary insurers much less protected against secondary peril events. However, reinsurers still offer ample cover against the most severe events. The reinsurance market appears to have returned to its pre-soft market state of providing capital protection for cedents, rather than earnings protection.
Natural catastrophe reinsurance has become largely loss-making in recent years as prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change.
This has reduced reinsurers’ appetite to provide natural catastrophe cover, particularly as other business lines are now benefitting from price rises that are higher than claims inflation.
There were insured natural catastrophe costs of USD53 billion globally, which is 47% above the 20-year average, according to Aon.
Tighter terms and conditions for natural catastrophe cover are a structural improvement that should benefit reinsurers’ risk profiles in the medium term as they are unlikely to be quickly reversed even when market conditions change.
Results from the Italian non-life market this week illustrate how weather-related losses will typically have more impact on profitability than before the reinsurance cutbacks began in 2022.
The increased exposure to weather-related losses was evident in the 9M2023 results of Italy’s three largest non-life insurers, Generali, Unipol and Allianz Italy.
All three reported that natural catastrophe losses net of reinsurance contributed more to their loss ratios than in 9M2022. This was the main cause of higher loss ratios for Unipol and Allianz Italy, although Generali’s ratio decreased, helped by lower non-catastrophe losses and prior-year reserve releases.
In Germany, for example, the Allianz group reported a 19.1pp impact from natural catastrophes in 3Q2023, compared with 14.3pp in 3Q2021, when Germany experienced its biggest natural catastrophe event in recent times with severe flooding in western parts of the country.
Insurance against natural catastrophe risk in Italy is low by European standards.
Most large commercial buildings are insured against natural catastrophes but only 15% of SME commercial real estate and 5% of residential real estate is covered, and only 5% of motor insurance policies include catastrophe cover, according to ANIA (Italy’s national association of insurance companies).
The Italian parliament is discussing a government proposal to introduce mandatory natural catastrophe insurance for businesses by end-2024.
This could create a business opportunity for insurers, but would be likely to make their results more volatile, particularly if reinsurers do not reverse their recent restrictions.
The higher loss ratios for Italian insurers in 9M2023 do not affect ratings. The three largest companies still reported combined ratios below 100%, indicating an underwriting profit, and analytics expect premium rates to increase, offsetting some if not all of the future effects of greater exposure to weather-related losses and higher reinsurance costs.
Motor insurance, the main business line, is likely to see significant premium increases as it is largely loss-making, partly due to the increased exposure to natural catastrophes.
by Yana Keller
